The economic crisis may offer an opportunity to set the world on the right track for addressing climate change, writes Ralf Martin.

Ralf Martin

English

Research Papers in Economics

CentrePiece Winter 2008/9
22
Saving the economy 
and the planet
The current economic crisis may actually offer an opportunity to set the world on
the right track for addressing climate change, writes Ralf Martin. He suggests that
governments should seize this chance to promote pro-environment fiscal stimulus
measures as well as an environmental tax reform.
The current global crisis (economic) and the potential
global crisis (environmental) are connected – or at least
they should be.
Some worry that the current crisis may make an
environmental disaster more likely by making governments
and companies less inclined to implement the necessary
regulatory framework and make the required investments.
As journalist and environmental campaigner George
Monbiot has written, we might be remembered as ‘the
generation that saved the banks and let the biosphere
collapse’.
But there is a more hopeful version of the two-crisis
connectedness. The current mess might actually help us to
address climate change and other environmental
problems.
The global economic crisis as a lesson
in the global ‘tragedy of the commons’
The global economic crisis illustrates how a global system
can suffer from failures that build up slowly over a long
time as a result of behaviour that each set of individual,
institutional and national actors finds rational or at least
politically expedient.
It also shows that such crises can be extremely costly to
address after it is ‘too late’, even those that would be 
relatively cheap to deal with early on. The parallels with
climate change are obvious.
The global response to the economic 
crisis as an opportunity
Another thing the economic crisis has illustrated is that
governments can act quite decisively if necessary. These
days, governments around the globe seem to be
competing in putting together ever more spectacular
rescue packages and fiscal stimuli. Clearly it would be
good if some of these government handouts could come
in the form of much needed investments required for
making the transition to a carbon-free economy.
A good idea for Europe, for example, would be any
contribution towards an integrated superconducting
electricity grid that can simultaneously harness and
distribute solar energy from northern Africa and offshore
wind energy from Northern Scotland and other places (see
http://desertec.org/).
in brief...
Governments should
promote fiscal stimulus
measures that benefit
the environmentCentrePiece Winter 2008/9
23
Another suggestion is to have subsidies for improving the
energy efficiency of the housing stock. This would very
directly help homeowners struggling with mortgage
payments as well as the hard hit building industry.
Climate change policies as a 
tax bomb shelter
A big worry with all of such measures is of course that
somebody in the future has to pick up the tab. The UK
opposition parties have accused the government of
heading towards a ‘tax bombshell’. Is this unavoidable? 
It might be that an old policy measure from the
environmental economists’ toolkit is just what
governments need right now to help both the economy
and the planet while avoiding a future tax bombshell. 
It’s called an environmental tax reform.
At present, most tax revenue is derived from taxes on
income and labour. In an environmental tax reform, we
would reduce these kinds of taxes and – in a revenue-
neutral way – levy taxes on energy usage or directly on
greenhouse gas emissions. Thus, rather than taxing
productive activities, we would tax damaging activities
such as pollution.
This would not only make much more economic sense,
but also provide a stimulus for jobs in both the short and
long run. Thus, it would be the ideal policy to implement
now in an effort to boost employment. But even better, it
is also a sustainable stimulus package that does not
require any extra borrowing. 
Fixing the regressive features of
pollution taxes
The standard argument against pollution taxes is that they
are likely to be regressive since poorer people spend a
larger fraction of their income on energy and thereby
pollution. But there are clever ways of dealing with this.
For example, since poorer people receive an even larger
fraction of their income in wages, proceeds from CO2 or
energy taxes could be used to reduce wage taxes
specifically, which would then offset the regressive impact
of pollution taxes.
Some simple arithmetic
1 suggests that this could increase
the income of the average wage earner by as much as
21%. Indeed, since the consumption behaviour of poorer
people is also more sensitive to changes in income, this
could actually provide an additional boost for the
economy.
Conclusion
The damage being wreaked by the global economic crisis
is nothing compared with the ‘environmental credit
crunch’ that could occur, at least according to climate
change campaigners. Governments should seize this ‘win-
win’ chance to promote fiscal stimulus that is also pro-
environment.
They should also take the occasion to embrace an
environmental tax reform by reducing wage taxes while
increasing taxes on greenhouse gas emissions. This would
provide a stimulus for employment while keeping
government budgets in balance and contributing to saving
the planet in the long run.
Ralf Martin is a research economist at CEP .
The economic crisis 
might actually help us to
address climate change
1 http://personal.lse.ac.uk/martinr/envpol/papers/taxAppendix.pdf 

In brief: Saving the economy and the planet

http://cep.lse.ac.uk/pubs/download/cp276.pdf

In brief: Saving the economy and the planet

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